Boeing reported a big net loss in the third quarter of $3.3 billion as management wrote off a massive $2.8 billion on defense-side programs, most notably another substantial charge on the Air Force tanker program.
Half an hour after Boeing reported the loss, Alaska Airlines softened the blow when it announced it is exercising options to purchase 52 Boeing 737 MAXs, the biggest Boeing airplane order in its 90-year history.
These additional MAXs, set for delivery between 2024 and 2027, will expand the airline’s confirmed 737 MAX fleet from 94 to 146.
While that news will buoy Boeing, otherwise it was a bad news day. The mounting charges on the defense-side business show no signs of abating.
Boeing registered losses on the fixed-price development contracts in its defense business, including the $1.2 billion on the KC-46 tanker for the Air Force and $766 million on Air Force One.
There were smaller losses also the T-7 jet fighter trainer for the Air Force, the MQ-25 aircraft carrier tanker drone for the Navy and the Commercial Crew space contract for NASA.
Combined with $8.8 billion in accounting charges in previous quarters, these programs have now racked up $12.1 billion in such write-offs.
And Boeing noted that the defense-side losses were exacerbated “by unfavorable performance on other programs.”
In an interview on CNBC Wednesday morning, Boeing CEO Dave Calhoun said the losses were driven by “a rough and tough supply chain world with a lot of pauses, a lot of interruptions.”
Those supply chain glitches have slowed production and brought higher manufacturing costs.
Calhoun said this may continue for the next 18 months.
“We’re not going to get better, we’re going to accept the world as it is. We’re going to run it out for the next year to year and a half,” Calhoun told CNBC. “The cash burn rate doesn’t get worse; it simply doesn’t get better during this period.”
He added that Boeing will in the future avoid fixed-price defense contracts in favor of contracts that cover whatever costs are incurred plus an added profit.
Specifically, he said it was a mistake to bid a fixed price on Air Force One and “it’s not our intention to ever do so” again.
In a note to investors after the earnings results came out, Nick Cunningham, an analyst with London-based Agency Partners, commented on Boeing’s constant flow of big accounting losses.
“Every quarter one hopes that the program specific bad news has come to an end, but then we get another installment,” Cunningham wrote. “Maybe this is It? Probably not.”
And Morgan Stanley analyst Kristine Liwag told investors that “the unexpected magnitude of charges in defense is concerning.”
The tanker program alone has now reported write-offs for four straight quarters. The cumulative total of charges to that program since 2014 now stands at $8.95 billion.
Earnings lower than low expectations
The Alaska order comes as the airline emerges from the pandemic downturn and plans for aggressive fleet growth starting next year.
The airline ordered three different jet models: the MAX 8, MAX 9 and still-to-be-certified MAX 10.
Market-pricing data from airplane-valuation firm Avitas suggests, that after standard discounts, the order is likely worth about $2.7 billion.
Alaska said it has also negotiated future purchase options for an additional 105 MAXs through 2030.
On CNBC, Calhoun commented that the 35 MAXs Alaska has in its fleet “are meeting all of their targets” in terms of fuel efficiency and sustainability.
“So they want to go long on these airplanes,” he said.
By the end of next year, Alaska expects to take delivery of another 43 MAXs and will at that point have retired all the Airbus jets inherited from its merger with Virgin America. It will then be operating an all-Boeing fleet again.
Boeing stock fell in early trading with the news of the earnings losses, rose on the Alaska news, then fell sharply again after Calhoun’s earnings teleconference with Wall Street analysts.
By midday on the east coast the stock was down around $4 to under $143, 3% below yesterday’s close.
The market may swing more as it digests the detail in the earnings report.
For the quarter, Boeing’s net loss of $3.3 billion, or $5.49 per share, came on lower than expected revenue of $16 billion.
This compares to a net loss in the third quarter of 2021 of $132 million, or 19 cents per share, on revenue of $15.3 billion.
The Defense and Space division reported a net loss from operations of $2.8 billion on revenue of $5.3 billion, an operating margin of negative 53%.
As Reuters first reported Tuesday, Boeing last week created a new position of chief operating officer for the division. That looks like a move to try to tighten control of its industrial operations and stem the losses.
Steve Parker, head of Boeing’s bomber and fighter programs as well as its St. Louis defense plants, was promoted to the new role, reporting to Defense and Space chief Ted Colbert.
Commercial Airplanes division fares better
The Commercial Airplanes division headquartered in the Puget Sound region also suffered a loss in the third quarter.
But that was due to the previous issues with its major jet programs. The division fared much better than the defense side, with no new negative surprises.
Commercial Airplanes reported a net loss from operations of $643 million on revenue of $6.3 billion, an operating margin of negative 10.3%.
The loss came from continued abnormal manufacturing costs from the earlier lengthy halts to 737 MAX and 787 production that have to be absorbed each quarter.
Calhoun told CNBC market demand for commercial airplanes is robust, as evidenced by Alaska’s order.
“Demand is not the problem for the Boeing company or for our industry,” he said. “Our job is to get that supply chain under control.”
Boeing finally resumed 787 deliveries in August after a 15-month hiatus. It delivered a total of nine in the quarter. It also delivered 88 Renton-built 737 MAXs, though deliveries continue to be much slower than hoped for.
Calhoun said the biggest hold up is slow supply of jet engines. GE, which makes the engines for the MAX, is struggling with a labor shortage, having laid off thousands of workers during the pandemic.
The only good news in the company’s quarterly earnings numbers was that the planemaker generated $2.9 billion in free cash flow in the quarter, easily beating Wall Street expectations — though the figure was swelled by a hefty tax refund of $1.5 billion that accounted for most of the difference
The cash-flow figure — the cash left after paying operating costs and expenditure on equipment — has recently been the financial datapoint most carefully scrutinized by investors as they look for signs that Boeing can restore some vibrancy to its operations.
S&P Global Market Intelligence had projected free cash flow would be just over $1 billion. The figure swelled mainly from the tax refund, plus increased deliveries of commercial jets, now including the 787, as well as from new jet order prepayments — including the new order from Alaska.
The quarterly financial data released Wednesday indicates that after a big net cash outflow of $3.7 billion in the first half of the year, Boeing will likely end the year with positive cash flow with the help of that tax refund.
A year ago in the third quarter, Boeing’s cash flow was a negative $507 million.
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